The End of Products

IoT analyst Dan Woods recently wrote an insightful Forbes piece on the recent PTC Global Live Conference, which focused on on how the Internet of Things is transforming the manufacturing industry.

PTC makes product design software, as well as product and service lifecycle management solutions. At the end of 2013, they purchased ThingWorx, a technology platform used to quickly create IoT applications. They’re making a big bet on IoT, and we’re happy to have them as a client.

Dan Woods’s main takeaway from their conference was that in a world where every physical device will eventually be web-enabled, the concept of a “product” is starting to blur. Could Dropbox be called a product? Steve Jobs didn’t think so when he offered to buy it — he called it a feature. Is iCloud mutually exclusive from iPhone, or do they constitute a single product?

Integrating products and services isn’t a new concept. There have always been after-market maintenance solutions, and at a very basic level IoT could be considered a virtual break/fix plan. The first wave of IoT will probably consist of devices that can diagnose their own problems and schedule their own field technician calls.

But then things will get much more interesting. IoT will move beyond efficiency and into possibility.

Dan Woods describes this evolutionary thinking through a five-step model, where a manufacturing company is “lagging” if they only think in terms of building and selling products, “advanced” if they start incorporating service agreements into those products, and “best in class” if they can can actually start selling the outcome that the product was purchased for, and the product itself becomes an ancillary means to an end.

Woods believes this is why we are seeing more outcome-based agreements. A healthcare IT firm signs a contract with a hospital promising to reduce its patient re-admittance rate by a certain percent. SpaceX signs a service level agreement with NASA guaranteeing a particular cabin environment to transport lab rats to the ISS. Caterpillar asks clients how much earth they need moved, not how many tractors they want to buy.

All hard good OEMs (original equipment manufacturers) are moving in this direction. Philips makes thousands of products, but these days they refer to themselves as a technology solutions partner. Here are the words of their CEO from their latest annual report:

“With the transformation of our business model architecture, we are increasingly becoming a technology solutions partner, with recurring revenue streams accounting for over 25% of sales. And we are shifting from transactions to relationships via service and solution business models.”

Similarly, Schneider Electric uses the word “solutions” in their most recent annual report:

“With the completion of the Invensys acquisition, we have built an integrated portfolio of energy and efficiency solutions to serve the customers of our four key markets.”

Finally, we have a great example in our client Thermo Fisher Scientific, who make amazing high-end scientific and medical equipment (their human genome scanner is the size of a toaster oven). For Thermo Fisher, the first step in connecting their devices was about efficiency: low supply alerts, part service notifications, etc.

But the next step was about possibility: What if we lower the cost of our equipment, and starting selling small university labs subscriptions to powerful analytic platforms? What if we can give a doctor in a developing country the same big data capabilities as the CDC headquarters in Atlanta? The products themselves start fading from the bigger picture.

At the end of his piece, Dan Woods quotes a bunch of very smart PTC executives who encourage companies to be open to the possibilities of Internet-connected devices, and to be agile and experimental enough to take advantage of them. Whether they make scanners or tractors, their products are going to be talking to them constantly, and data through fiber will be as important as electricity through copper.

It’s a great article, and was obviously a hugely successful effort on the part of PTC, but we’d like to argue a broader point: IoT isn’t just about allowing companies to go beyond static products. IoT is about enabling companies to meet the demands of today’s changing consumer.

Consumers today are more informed and demanding than they were ten years ago by an order of magnitude. They have the world’s store of knowledge at their fingertips. They expect ongoing value and unique experiences. And they’re not as interested in methods as they are outcomes.

Stand-alone products don’t cut it anymore. Other than picking a color or slapping a monogram on it, a stand-alone product can’t be personalized. A product can’t learn your behavior and preferences. A product can’t be constantly upgraded, so that it gets better and better — instead, it simply gets obsolete.

People increasingly view owning something as simply managing the decline of a physical asset.

To meet the expectations of today’s customer, companies must move beyond products into services — from a product experience to a subscription experience. They have to create services that can learn and adapt based on behavior. Services that can improve themselves autonomously. Services that can be truly customized.

Sure, there will always be an actual physical object involved, but the point isn’t to ask “What can an Internet-enabled device do?” but rather “What do customers really want, and how can I deliver that as an intuitive service, rather than a stand-alone product?”

Nest isn’t just a thermostat remembers your heating patterns after a week, it’s a central nervous system for your house that tells you when particulates are in your air, or raccoons are in your yard. An Autonet Mobile connected car isn’t just a vehicle with a 4G connection and a map (something you can get with your phone, anyway). It’s a diagnostic system on wheels that tells your garage to schedule an emissions-level check or lets you know when your teenager is driving too fast.

The next eighteen months will see a tectonic consumer shift towards connected devices, from automobiles to homes to wearables. There will be as many failures as successes, and here at Zuora we’re very excited to be right in the middle of it. We’re having conversations with some of the best and biggest manufacturing companies in the world. Because ultimately IoT is not just about extending a product’s capabilities. It’s about creating a world where a product is not a product — it’s a service.

PTC is right about the need for more manufacturers to shift towards service-based outcomes. But we’re not advocating an evolutionary transition. We’re advocating a complete reinvention.

To meet the demands of today’s consumer, companies will need a clean break from their old product-based business models. They will need to reinvent themselves as subscription-based platforms.

They will need to flip the switch from selling products to managing services. Honeywell did it. Lowe’s did it. And trust us, many others are coming.